Cable's review to tackle 'cross-pollination' of boardroom pay

If employees sat on the committees that set bosses' pay, we might see a diminution in their remuneration packages, suggests Richard Northedge

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The Independent Online

The full extent to which chairpersons and chief executives at one public company can set the pay of the senior directors at other companies has emerged in research carried out for The Independent on Sunday.

It shows the potential for "cross-pollination" between directors of the UK's top companies, a relationship usually between the non-executive directors of companies who sit on the all-important remuneration committees which set board pay.

Looking at the extent to which cross-pollination may be a factor in high-pay culture in boardrooms is one of the key issues being scrutinised by Vince Cable, the Business Secretary, who is due to report on new proposals on corporate pay early in the new year.

It is no surprise that FTSE 100 business leaders fear proposals that could put ordinary employees on the key committees that set the pay of their firms' bosses. But a recent Department for Business, Innovation and Skills discussion paper has raised the issue of whether the practice of senior executives of one company sitting on the remuneration committees of other firms has contributed to the culture that caused directors' pay to rise by 41 per cent last year.

The department paper referring to pollination between boards says: "There may be a risk of this where a non-executive is involved in setting the pay of someone who, in another company, may have a role in setting theirs."

To look into the basis of "cross-pollination" concerns, The IoS examined the most recent published company annual reports and information on corporate websites.

At Bovis, the housebuilders, Colin Holmes chairs the remuneration committee with a former banker, Alastair Lyons, as one of the other two members. But at Admiral Group, the insurance group, Holmes sits on its remuneration committee setting the pay of its chairman – Lyons.

The Department for Business says it is extremely common for individual directors to have a role in several companies, either as executives or part-time non-executives. So stakeholders had argued that "there is a strong case for preventing these situations from arising", it states.

But Damien Knight, a director at the executive pay consultancy MM&K, has submitted figures to the department claiming such practises are not common. "It's just not true," he says. "There is not one pair of FTSE 100 executives with membership of each other's boards."

However, there still may be cases where one party is a non-executive chairperson whose pay is set by these committees. Sir John Peace and David Tyler are both on the remuneration committee at the Burberry fashion group. But at the Experian credit agency – another FTSE 100 company – Tyler sits on its committee which decides the pay of the chairman, who is Peace.

The High Pay Commission last month produced a report calling for greater diversity on remuneration committees to curb the inflation in directors' rewards. Deborah Hargreaves, who chairs the commission, says: "Our work has shown we must now break open the closed shop that sets pay for our top directors and get back to basics on executive pay."

She adds: "The make-up of the non-executive directors, who determine executive pay deals, could be having an inflationary effect on pay. Even looked at in the most positive light, non-executive directors often come from a relatively small pool of individuals."

Remuneration committees comprise non-executive directors, some of whom can earn directorship fees of £125,000 a year. But the department's paper refers to concerns that they are drawn from too narrow a group – including executives of other companies.

Sarah Wilson, chief executive of the shareholder advisory firm Manifest monitors board structures, says "We've moved on considerably from the days of cosy remuneration committees. I do not think one person can have that much influence."

But the TUC has told the Government it welcomes the proposal for employee representation on remuneration committees and is ready to organise training for workers. However, Janet Williamson, a senior policy officer, says: "We are expecting fierce opposition from the corporate sector and the City. Those groups have a lot invested in the status quo."

The Association of British Insurers, which represents shareholders, will oppose the proposal. Its investor affairs spokesman, Marc Jobling, says: "We agree that diversity of perspective is extremely important, not just on remuneration committees, but across the board as a whole. That addresses the 'cosy club' issue. There's a danger of group-think."

However, he claims directors' pay in European countries with worker-representatives can be equally high.

Even if straight swaps between boards are relatively rare, critics say the whole ethos of executives from one company setting the pay for top directors at another has the potential for a conflict of interest. While not directly boosting their own rewards, they are keeping corporate pay packages high, setting an environment for their own remuneration to rise when it is reviewed.

Hargreaves' reports states: "The current market in executive pay relies on non-executive directors, acting in the interests of shareholders to bargain with the executive, who is acting in his own personal interest.

"Most boards are made up predominantly of men from a financial or managerial background. Many of these non-executives are either current executive directors at other companies or recently retired executives. While they have no direct interest in the company, they may have an indirect financial interest in the level of remuneration given. Individuals taken from the same background are more prone to 'group think'."

Large numbers of executives on committees which set the pay for their peers can be detected in British boardrooms. For example, the Admiral's remuneration committee, which sets Lyons's pay, is chaired by John Sussens, who also chairs the committee at Cookson that assesses the pay of its chairman, Jeff Harris. But Harris sits on WH Smith's pay committee, which determines the pay package for its chief executive, Kate Swann – and she is on the pay committee at Babcock International whose chief executive is Peter Rogers. Rogers sits on the pay committee at Galliford Try, the house-building firm, alongside Andrew Jenner who is finance director at the Serco services group – whose chairman is also Alastair Lyons.

The remuneration committee at Experian, on which David Tyler also sits, sets the pay of the chief executive, Don Robert. He, in turn, sits on the remuneration committee of the catering group Compass which decides on the pay of the chief executive, Richard Cousins. Cousins is himself on the remuneration committee of Reckitt Benckiser, the household products business which was run by Bart Brecht. Tyler was himself a Reckitt director until 2009.

It's only recently that trade bodies such as the Institute of Directors have become more closely involved in the debate, as they fear that the reputation of business generally is being damaged. Indeed, it was the IoD's director general, Simon Walker, who attacked "unsustainable" rises in boardroom pay. And it is the IoD which suggests there should be voluntary discussions between employee representatives and remuneration committees and more information about the consultants used to help.